Align Technology (ALGN)

On January 6, 2003, Ormco Corporation (Ormco) filed suit against
the Company in the United States District Court for the Central District,
Orange County Division, asserting infringement of certain patents. Ormco is a
division of Sybron Dental Specialties (a Danaher Corporation subsidiary). The complaint sought unspecified monetary
damages and injunctive relief. On February 18, 2003, the Company answered
the complaint and asserted counterclaims seeking a declaration by the Court of
invalidity and non-infringement of the asserted patents. In addition, the
Company counterclaimed for infringement of one of its patents, seeking
unspecified monetary damages and injunctive relief. Ormco filed a reply to its
counterclaims on March 10, 2003 and asserted counterclaims against the
Company seeking a declaration by the Court of invalidity and non-infringement
of the patent. The Company amended its counterclaim to add Allesee Orthodontic
Appliances, Inc. (AOA), a wholly-owned subsidiary of Ormco, as a
counterdefendant in regard to its counterclaim of infringement of the patent.

There have been two appeals. After the permanent injunction was
entered, Ormco and AOA appealed that injunction and the orders of the District
Court on summary judgment on which the injunction was based. In April 2006,
the U.S. Court of Appeals for the Federal Circuit (CAFC) issued a ruling
declaring two out of a total of 71 claims in the Companys US Patent No. 6,398,548
and four out of a total of ten claims in US Patent No. 6,554,611 to be
invalid as obvious. The CAFCs decision reversed the California District
Court summary judgment order of validity.

The second
appeal was from the final judgment. Ormco appealed the ruling of the District
Court that 92 claims in four of its patents are not infringed by the Company
and that the asserted claims are invalid. Align appealed the ruling of the
District Court that certain claims of its 6,398,548 patent which were found to
be infringed by Ormcos and AOAs Red, White & Blue appliances were
invalid. The CAFC issued a ruling on August 24, 2007, affirming the
District Courts ruling that 86 out of 92 claims in the four asserted Ormco
patents are invalid and not infringed by Align. The CAFC reversed the District
Courts non-infringement rulings on six claims in Ormcos 6,616,444 patent,
which will be returned to the District Court for a determination of validity
and infringement of those claims. The Court denied Ormcos petition for
rehearing with respect to the portion of the Federal Circuits opinion that
affirmed the District Courts ruling of non-infringement and non-enablement of
the 86 claims. On Aligns cross-appeal, the CAFC affirmed the District Courts
finding that six claims in the 6,398,548 patent are invalid.

Ormco filed a
petition for review with the U.S. Supreme Court with respect to the portion of
the CAFCs opinion that affirmed the District Courts ruling of
non-infringement and non-enablement of Ormcos 86 claims. The Supreme Court
denied Ormcos petition, and the case on the six claims in Ormcos 444 patent
has been returned to the District Court for further proceedings.

The District
Court issued orders construing the claim terms at issue and granting Aligns
motion to amend its answer and counterclaim to assert inequitable conduct. The parties are currently conducting
discovery. Trial on liability issues is scheduled for June 2,
2009.

Class Action

On May 18, 2007, Debra A. Weber filed a consumer class action
lawsuit against Align, OrthoClear, Inc. and OrthoClear Holdings, Inc.
(d/b/a OrthoClear, Inc.) in Syracuse, New York, U.S. District Court. The
complaint alleges two causes of action against the OrthoClear defendants and
one cause of action against Align for breach of contract. The cause of action
against the Company, titled Breach of Third Party Benefit Contract references
Aligns agreement to make Invisalign treatment available to OrthoClear
patients, alleging that the Company failed to provide the promised treatment
to Plaintiff or any of the class members.

On July 3, 2007, the Company filed an answer to the complaint and
asserted 17 affirmative defenses. On July 20, 2007, the Company filed a
motion for summary judgment on the Third Cause of Action (the only cause of
action alleged against Align). On August 24, 2007, Weber filed a motion
for class certification. On October 1, 2007, the Company filed an
opposition to the motion for class certification and it is currently awaiting
rulings from the Court. OrthoClear has filed a motion to dismiss. The initial
case management conference and all discovery has been stayed pending the Courts
decision on the motion for class certification, OrthoClears motion to dismiss
and the Companys motion for summary judgment.

Litigating claims of these types, whether or not ultimately determined
in the Companys favor or settled by the Company, is costly and diverts the
efforts and attention of the Companys management and technical personnel from
normal business operations. Any of these results from litigation could
adversely affect the Companys results of operations. From time to time, the
Company has received, and may again receive, letters from third parties drawing
the Companys attention to their patent rights. While the Company does not
believe that it infringes any such rights that have been brought to the Companys
attention, there may be other more pertinent proprietary rights of which the
Company is presently unaware.

On January 6,
2003, Ormco Corporation (Ormco) filed suit against the Company in the United
States District Court for the Central District, Orange County Division,
asserting infringement of certain patents. Ormco is a division of Sybron Dental
Specialties (a Danaher Corporation subsidiary).
The complaint sought unspecified monetary damages and injunctive relief.
On February 18, 2003, the Company answered the complaint and asserted
counterclaims seeking a declaration by the Court of invalidity and
non-infringement of the asserted patents. In addition, the Company
counterclaimed for infringement of one of its patents, seeking unspecified
monetary damages and injunctive relief. Ormco filed a reply to its
counterclaims on March 10, 2003 and asserted counterclaims against the
Company seeking a declaration by the Court of invalidity and non-infringement
of the patent. The Company amended its counterclaim to add Allesee Orthodontic
Appliances, Inc. (AOA), a wholly-owned subsidiary of Ormco, as a
counterdefendant in regard to its counterclaim of infringement of the patent.

There have been
two appeals. After the permanent injunction was entered, Ormco and AOA appealed
that injunction and the orders of the District Court on summary judgment on which
the injunction was based. Oral arguments took place on April 3, 2006.
Following oral arguments, the U.S. Court of Appeals for the Federal Circuit
(CAFC) issued a ruling declaring two out of a total of 71 claims in the
Companys US Patent No. 6,398,548 and four out of a total of ten claims in
US Patent No. 6,554,611 to be invalid as obvious. The CAFCs decision
reverses the California District Court summary judgment order of validity.

The second appeal
was from the final judgment. Ormco appealed the ruling of the District Court
that 92 claims in four of its patents are not infringed by the Company and that
the asserted claims are invalid. Align appealed the ruling of the District
Court that certain claims of its 6,398,548 patent which were found to be
infringed by Ormcos and AOAs Red, White & Blue appliances were
invalid. The CAFC issued a ruling on August 24, 2007, affirming the
District Courts ruling that 86 out of 92 claims in the four asserted Ormco
patents are invalid and not infringed by Align. The CAFC reversed the District
Courts non-infringement rulings on six claims in Ormcos 6,616,444 patent,
which will be returned to the District Court for a determination of validity
and infringement of those claims. The Court has denied Ormcos petition for
rehearing with respect to the portion of the Federal Circuits opinion that
affirmed the District Courts ruling of non-infringement and non-enablement of
the 86 claims. On Aligns cross-appeal, the CAFC affirmed the District Courts
finding that six claims in the 6,398,548 patent are invalid.

Ormco filed a petition
for review with the U.S. Supreme Court with respect to the portion of the
CAFCs opinion that affirmed the District Courts ruling of non-infringement
and non-enablement of Ormcos 86 claims. The Supreme Court denied Ormcos
petition. In addition, the District
Court has set a schedule for the case to proceed on the six claims in Ormcos
444 patent which were returned to the District Court for further
proceedings. The parties are currently conducting
discovery. Trial dates have been set for February 10, 2009 on
liability issues, and for September 2009 on damages issues.

Class Action

On May 18,
2007, Debra A. Weber filed a consumer class action lawsuit against Align,
OrthoClear, Inc. and OrthoClear Holdings, Inc. (d/b/a OrthoClear, Inc.)
in Syracuse, New York, U.S. District Court. The complaint alleges two causes of
action against the OrthoClear defendants and one cause of action against Align
for breach of contract. The cause of action against the Company, titled Breach
of Third Party Benefit Contract references Aligns agreement to make
Invisalign treatment available to OrthoClear patients, alleging that the
Company failed to provide the promised treatment to Plaintiff or any of the
class members.

On July 3,
2007, the Company filed an answer to the complaint and asserted 17 affirmative
defenses. On July 20, 2007, the Company filed a motion for summary
judgment on the Third Cause of Action (the only cause of action alleged against
Align). On August 24, 2007, Weber filed a motion for class certification.
On October 1, 2007, the Company filed an opposition to the motion for
class certification and it is currently awaiting rulings from the Court.
OrthoClear has filed a motion to dismiss. The initial case management
conference and all discovery has been stayed pending the Courts decision on
the motion for class certification, OrthoClears motion to dismiss and the
Companys motion for summary judgment.

Litigating claims
of these types, whether or not ultimately determined in the Companys favor or
settled by the Company, is costly and diverts the efforts and attention of the
Companys management and technical personnel from normal business operations.
Any of these results from litigation could adversely affect the Companys
results of operations. From time to time, the Company has received, and may
again receive, letters from third parties drawing the Companys attention to
their patent rights. While the Company does not believe that it infringes any
such rights that have been brought to the Companys attention, there may be
other more pertinent proprietary rights of which the Company is presently
unaware.

On January 6,
2003, Ormco Corporation (Ormco) filed suit against the Company in the United
States District Court for the Central District, Orange County Division,
asserting infringement of certain patents. Ormco is a division of Sybron Dental
Specialties (a Danaher Corporation subsidiary).
The complaint sought unspecified monetary damages and injunctive relief.
On February 18, 2003, the Company answered the complaint and asserted
counterclaims seeking a declaration by the Court of invalidity and
non-infringement of the asserted patents. In addition, the Company counterclaimed
for infringement of one of its patents, seeking unspecified monetary damages
and injunctive relief. Ormco filed a reply to its counterclaims on March 10,
2003 and asserted counterclaims against the Company seeking a declaration by
the Court of invalidity and non-infringement of the patent. The Company amended
its counterclaim to add Allesee Orthodontic Appliances, Inc. (AOA), a
wholly-owned subsidiary of Ormco, as a counterdefendant in regard to its
counterclaim of infringement of the patent.

There have been
two appeals. After the permanent injunction was entered, Ormco and AOA appealed
that injunction and the orders of the District Court on summary judgment on
which the injunction was based. Oral arguments took place on April 3,
2006. Following oral arguments, the U.S. Court of Appeals for the Federal
Circuit (CAFC) issued a ruling declaring two out of a total of seventy-one
claims in the Companys US Patent No. 6,398,548 and four out of a total of
ten claims in US Patent No. 6,554,611 to be invalid as obvious. The CAFCs
decision reverses the California District Court summary judgment order of
validity.

The second appeal
was from the final judgment. Ormco appealed the ruling of the District Court
that 92 claims in four of its patents are not infringed by the Company and that
the asserted claims are invalid. Align appealed the ruling of the District
Court that certain claims of its 6,398,548 patent which were found to be
infringed by Ormcos and AOAs Red, White & Blue appliances were invalid.
The CAFC issued a ruling on August 24, 2007, affirming the District Courts
ruling that 86 out of 92 claims in the four asserted Ormco patents are invalid
and not infringed by Align. The CAFC reversed the District Courts
non-infringement rulings on six claims in Ormcos 6,616,444 patent, which will
be returned to the District Court for a determination of validity and
infringement of those claims. The Court has denied Ormcos petition for
rehearing with respect to the portion of the Federal Circuits opinion that
affirmed the District Courts ruling of non-infringement and non-enablement of
the 86 claims. The CAFC has not yet ruled on Ormcos petition. On Aligns
cross-appeal, the CAFC affirmed the District Courts finding that six claims in
the 6,398,548 patent are invalid.

9

Ormco has filed a
petition with the U.S. Supreme Court asking for an extension of time in which
to file a petition for review by the U.S. Supreme Court with respect to
the portion of the CAFCs opinion that affirmed the District Courts ruling of
non-infringement and non-enablement of the 86 claims. The Supreme Court granted
Ormcos petition for an extension of time. On February 14, 2008, Ormco
filed with the U.S. Supreme Court a petition for review of the Federal Circuits
ruling that 86 of Ormcos patent claims are not infringed and are invalid. The Company filed a response to Ormcos
petition on April 7, 2008.
Ormco will have an opportunity to reply to the Companys response. Meanwhile, the District Court has set a
schedule for the case to proceed on the six claims in Ormcos 444 patent which
were returned to the District Court for further proceedings. The parties
are currently conducting discovery. Trial dates have been set for February 10,
2009 on liability issues, and for September 2009 on damages issues.

Class Action

On May 18,
2007, Debra A. Weber filed a consumer class action lawsuit against Align,
OrthoClear, Inc. and OrthoClear Holdings, Inc. (d/b/a OrthoClear, Inc.)
in Syracuse, New York, U.S. District Court. The complaint alleges two causes of
action against the OrthoClear defendants and one cause of action against Align
for breach of contract. The cause of action against the Company, titled Breach
of Third Party Benefit Contract references Aligns agreement to make
Invisalign treatment available to OrthoClear patients, alleging that the
Company failed to provide the promised treatment to Plaintiff or any of the
class members.

On July 3,
2007, the Company filed an answer to the complaint and asserted 17 affirmative
defenses. On July 20, 2007, the Company filed a motion for summary
judgment on the Third Cause of Action (the only cause of action alleged against
Align). On August 24, 2007, Weber filed a motion for class certification.
On October 1, 2007, the Company filed an opposition to the motion for
class certification and it is currently awaiting rulings from the Court.
OrthoClear has filed a motion to dismiss. The initial case management
conference and all discovery has been stayed pending the Courts decision on
the motion for class certification, OrthoClears motion to dismiss and the
Companys motion for summary judgment.

Litigating claims
of these types, whether or not ultimately determined in the Companys favor or
settled by the Company, is costly and diverts the efforts and attention of the
Companys management and technical personnel from normal business operations.
Any of these results from litigation could adversely affect the Companys
results of operations. From time to time, the Company has received, and may
again receive, letters from third parties drawing the Companys attention to
their patent rights. While the Company does not believe that it infringes any
such rights that have been brought to the Companys attention, there may be
other more pertinent proprietary rights of which the Company is presently
unaware.

On January 6, 2003, Ormco Corporation (Ormco) filed suit against
us in the United States District Court for the Central District, Orange County
Division, asserting infringement of U.S. Patent Nos. 5,447,432, 5,683,243 and
6,244,861. Ormco is a division of Sybron Dental Specialties. In May 2006,
Danaher Corporation acquired Sybron Dental Specialties. The complaint sought
unspecified monetary damages and injunctive relief. On February 18, 2003,
we answered the complaint and asserted counterclaims seeking a declaration by
the Court of invalidity and non-infringement of the asserted patents. In addition,
we counterclaimed for infringement of our U.S. Patent No. 6,398,548,
seeking unspecified monetary damages and injunctive relief. Ormco filed a reply
to our counterclaims on March 10, 2003 and asserted counterclaims against
us seeking a declaration by the Court of invalidity and non-infringement of
U.S. Patent No. 6,398,548. We amended our counterclaim to add Allesee
Orthodontic Appliances, Inc. (AOA), a wholly-owned subsidiary of Ormco,
as a counterdefendant in regard to our counterclaim of infringement of U.S.
Patent No. 6,398,548. The Court then permitted Ormco to amend its
Complaint and permitted us to amend our counterclaim to add an additional
patent each. Ormco filed a first amended complaint for infringement of U.S.
Patent No. 6,616,444 on October 15, 2003. On October 27, 2003,
we filed an answer to Ormcos first amended complaint and a counterclaim for
invalidity and non-infringement of U.S. Patent No. 6,616,444 and for
infringement of U.S. Patent No. 6,554,611.

In connection with these claims, the Court granted five motions for
summary judgment that we filed. First, on May 14, 2004, the Court granted
our motion for summary judgment of non-infringement, finding that our
Invisalign system does not infringe any of the asserted Ormco patents (5,477,432,
5,683,243, 6,244,861 and 6,616,644). Second, on July 2, 2004, the Court
granted in part our motion for summary judgment of infringement, finding that
Ormco and AOA infringe certain, but not all, claims of our patents Nos.
6,398,548 and 6,554,611 through the manufacture and sale of Red,
White & Blue appliances. Third, on August 26, 2004, the Court
granted our motion for summary judgment of invalidity of Ormcos asserted
patents claims (5,477,432, 5,683,243, 6,244,861 and 6,616,644). As noted above,
the Court earlier found that we do not infringe these patents. In addition, the
Court also denied Ormcos and AOAs motion for summary judgment seeking a
finding of invalidity of our asserted patent claims (6,398,548 and 6,554,611).
Fourth, the Court granted our summary judgment motion that our asserted patent
claims are not invalid based on the evidence currently before the Court.
Although the Court granted that motion, it reopened discovery on two additional
invalidity arguments Ormco and AOA asserted. Fifth, the Court also granted our
summary judgment motion that our patents are not unenforceable and granted
Ormcos and AOAs summary judgment motion that Ormco and AOA did not willfully
infringe our patents.

On December 20, 2004, we filed a further summary judgment motion
that our asserted claims are not invalid based on Ormcos and AOAs new
evidence. Ormco and AOA filed a counter-summary judgment motion that our
asserted claims are invalid based on this new evidence. The motions were heard
by the Court on February 7, 2005. On February 24, 2005, the Court
granted our motion in part, confirming the validity of all of the asserted
claims of our 6,554,611 patent and two of the asserted claims of our 6,398,548
patent. The Court also granted Ormcos and AOAs motion in part, finding
certain claims of our 6,398,548 patent to be invalid in view of prior use
evidence. On March 10, 2005, Ormco and AOA moved for reconsideration of
the Courts ruling that Claims 10 and 17 of our U.S. Patent No. 6,398,548
are not invalid. On April 8, 2005,
the Court ruled that it would adhere to its previous ruling that Claims 10 and
17 of our 6,398,548 patent are not invalid.

On March 28, 2005, we filed a motion for permanent injunction to
prevent Ormco and AOA from selling the infringing Red, White & Blue
system. On May 26, 2005, the Court
issued a permanent injunction (the Permanent Injunction) to enjoin Ormco and
AOA from further infringement of Claims 10 and 17 of our 6,398,548 patent and
Claims 1-3 and 7 of our 6,554,611 patent. On May 31, 2005, Ormco and AOA
noticed an appeal to the Federal Circuit from the Permanent Injunction.

There
have been two appeals. After the
Permanent Injunction was entered, Ormco and AOA appealed that injunction and
the orders of the District Court on summary judgment on which the injunction
was based. Oral argument took place on
April 3, 2006. Following oral argument,
the U.S. Court of Appeals for the Federal Circuit (CAFC) issued a ruling
declaring two out of a total of seventy-one claims in our US Patent No.
6,398,548 and four out of a total of ten claims in US Patent No. 6,544,611 to
be invalid as obvious. The CAFCs decision reverses the California District
Court summary judgment order of validity.

26

The 6,398,548 patent consists of seventy-one claims;
only claims 10 and 17 were at issue in the first appeal and CAFC ruling. These
two claims are directed to a system of appliances and method of repositioning
teeth from an initial to a final tooth arrangement where at least some of the
appliances are marked to show order of use. These claims contain further
limitations requiring instructions as to order in which the appliances are to
be worn and use of the appliances in intervals of 2-20 days.

The 6,544,611 patent consists of ten claims directed
to a system for repositioning teeth that includes one or more intermediate
appliances and a final appliance, provided in a single package, as well as
instructions which set forth the order in which the appliances are to be worn.
The CAFCs ruling pertains only to claims 1, 2, 3 and 7 in the patent.

The second appeal was from the final judgment. Ormco appealed the ruling of the District
Court that 92 claims in four of its patents are not infringed by us and that
the asserted claims are invalid. We
appealed the ruling of the District Court that certain claims of our 6,398,548
patent which were found to be infringed by Ormcos and AOAs Red, White &
Blue appliances were invalid. The CAFC
issued a ruling on August 24, 2007, affirming the District Courts ruling that
86 out of 92 claims in Ormcos 5,447,432, 5,683,243, 6,244,861 and 6,616,444
patents are invalid and not infringed by Align.
The CAFC reversed the District Courts non-infringement rulings on six claims
in Ormcos 6,616,444 patent, which will be returned to the District Court for a
determination of validity and infringement of those claims. The Court has denied Ormcos petition for
rehearing with respect to the porting of the Federal Circuits opinion that
affirmed the District Courts ruling of non-infringement and non-enablement of
the 86 claims.

On our cross-appeal, the CAFC affirmed the District
Courts finding that six claims in our 6,398,548 patent (claims 1-3 and 11-13)
are invalid. These six claims are
directed to a system of appliances and method of repositioning teeth from an
initial to a final tooth arrangement where at least some of the appliances are
marked to show order of use. The majority of the claims in the 6,398,548
patent, including claims that address methods of fabricating aligners, digital
data sets or computer-generated models to fabricate appliances, are unaffected
by the second appeal and the CAFCs ruling.

Although we previously entered into a settlement agreement (the Settlement
Agreement) with Ormco and AOA pursuant to which Ormco and AOA were required to
pay into escrow, pending the completion of the appeals process as discussed
above, $884,000 to resolve the issues of past damages, willfulness and
attorneys fees for the adjudged infringement of two of our patents (the Align
Patents) through the manufacture and sale of Ormcos and AOAs Red, White
& Blue appliances. Our receipt of
the payments out of escrow was contingent upon the Court, in a final,
non-appealable judgment, finding that Ormco or AOA infringes at least one of
the claims in the Align Patents. As
discussed above, the CAFC has now issued a final, non-appealable judgment of
invalidity with respect to each asserted claim of the Align Patents, and therefore
all funds in the escrow account will be returned to Ormco and AOA.

On January 6, 2003, Ormco Corporation (Ormco)
filed suit against the Company in the United States District Court for the
Central District, Orange County Division, asserting infringement of certain
patents. Ormco is a division of Sybron Dental Specialties. In May 2006, Danaher
Corporation acquired Sybron Dental Specialties. The complaint sought
unspecified monetary damages and injunctive relief. On February 18, 2003,
the Company answered the complaint and asserted counterclaims seeking a
declaration by the Court of invalidity and non-infringement of the asserted
patents. In addition, the Company counterclaimed for infringement of one of its
patents, seeking unspecified monetary damages and injunctive relief. Ormco
filed a reply to its counterclaims on March 10, 2003 and asserted
counterclaims against the Company seeking a declaration by the Court of
invalidity and non-infringement of the patent. The Company amended its
counterclaim to add Allesee Orthodontic Appliances, Inc. (AOA), a
wholly-owned subsidiary of Ormco, as a counterdefendant in regard to its
counterclaim of infringement of the patent.

On February 1, 2006, the Company entered into a
settlement agreement (the Settlement Agreement) with Ormco and AOA. In accordance with the terms of the
Settlement Agreement, Ormco and AOA paid
into escrow, pending the completion of the appellate process, $884,000 to resolve
the issues of past damages, willfulness and attorneys fees for the adjudged
infringement of two of the Companys patents
(the Align Patents) through the manufacture and sale of Ormcos and
AOAs Red, White & Blue appliances.
The Companys receipt of the payments out of escrow is contingent upon
the Court, in a final, non-appealable judgment, finding that Ormco or AOA
infringes at least one of the claims in the Align Patents. If, however, the Court issues a final,
non-appealable judgment of non-infringement, invalidity or unenforceability
with respect to each asserted claim of the Align Patents, all funds in the
escrow account will be returned to Ormco and AOA. The Settlement Agreement does not affect (a)
Ormcos appeal of the decisions and orders of the District Court relating to
Ormcos patents; or (2) our pending cross-appeal of the orders of the District
Court relating to our patents.

There have been two
appeals. After the permanent injunction
was entered, Ormco and AOA appealed that injunction and the orders of the
District Court on summary judgment on which the injunction was based. Oral argument took place on April 3,
2006. Following oral argument, the U.S.
Court of Appeals for the Federal Circuit (CAFC) issued a ruling declaring two
out of a total of seventy-one claims in our US Patent No. 6,398,548 and four
out of a total of ten claims in US Patent No. 6,544,611 to be invalid as obvious.
The CAFCs decision reverses the California District Court summary judgment
order of validity.

The second appeal is from
the final judgment. Once final judgment was entered, Ormco filed a Notice of
Appeal from the final judgment and the Company filed a notice of
cross-appeal. Ormco has appealed the
ruling of the District Court that its patents are not infringed by the Company
and that the asserted claims are invalid.
The Company appealed the ruling of the District Court that certain
claims of its 6,398,548 patent which were found to be infringed by Ormcos and
AOAs Red, White & Blue appliances were invalid. Briefing on this appeal and cross-appeal is
complete, and oral argument occurred on February 6, 2007. The Federal Circuit has not yet issued a
ruling.

Class Action

On May 18, 2007, Debra A.
Weber filed a consumer class action lawsuit against Align, OrthoClear, Inc. and
OrthoClear Holdings, Inc. (d/b/a OrthoClear, Inc.) in Syracuse, New York, U.S.
District Court. The complaint alleges
two causes of action against the OrthoClear defendants and one cause of action
against Align for breach of contract.
The cause of action against the Company, titled Breach of Third Party
Benefit Contract references Aligns agreement to make Invisalign treatment available to OrthoClear patients,
alleging that the Company failed to provide the promised treatment to
Plaintiff or any of the class members.
The Company intends to vigorously defend itself against this lawsuit.

Litigating claims
of these types, whether or not ultimately determined in the Companys favor or
settled by the Company, is costly and diverts the efforts and attention of the
Companys management and technical personnel from normal business
operations. Any of these results from
litigation could adversely affect the Companys results of operations. From time to time, the Company has received,
and may again receive, letters from third parties drawing the Companys
attention to their patent rights. While the Company does not believe that it
infringes any such rights that have been brought to the Companys attention,
there may be other more pertinent proprietary rights of which the Company is
presently unaware.

On January 6, 2003, Ormco Corporation (Ormco)
filed suit against the Company in the United States District Court for the
Central District, Orange County Division, asserting infringement of certain
patents. Ormco is a division of Sybron Dental Specialties. In May 2006, Danaher
Corporation acquired Sybron Dental Specialties. The complaint sought
unspecified monetary damages and injunctive relief. On February 18, 2003,
The Company answered the complaint and asserted counterclaims seeking a
declaration by the Court of invalidity and non-infringement of the asserted
patents. In addition, the Company counterclaimed for infringement of one of its
patents, seeking unspecified monetary damages and injunctive relief. Ormco
filed a reply to its counterclaims on March 10, 2003 and asserted
counterclaims against the Company seeking a declaration by the Court of
invalidity and non-infringement of the patent. The Company amended its
counterclaim to add Allesee Orthodontic Appliances, Inc. (AOA), a
wholly-owned subsidiary of Ormco, as a counterdefendant in regard to its
counterclaim of infringement of the patent.

On
February 1, 2006, the Company entered into a settlement agreement (the Settlement
Agreement) with Ormco and AOA. In
accordance with the terms of the Settlement Agreement, Ormco and AOA paid into
escrow, pending the completion of the appellate process, $884,000 to resolve
the issues of past damages, willfulness and attorneys fees for the adjudged
infringement of two of the Companys patents
(the Align Patents) through the manufacture and sale of Ormcos and
AOAs Red, White & Blue appliances.
The Companys receipt of the payments out of escrow is contingent upon
the Court, in a final, non-appealable judgment, finding that Ormco or AOA
infringes at least one of the claims in the Align Patents. If, however, the Court issues a final,
non-appealable judgment of non-infringement, invalidity or unenforceability
with respect to each asserted claim of the Align Patents, all funds in the escrow
account will be returned to Ormco and AOA.
The Settlement Agreement does not affect (a) Ormcos appeal of the
decisions and orders of the District Court relating to Ormcos patents; or (2)
our pending cross-appeal of the orders of the District Court relating to our
patents.

There have been two appeals. After the permanent injunction was entered,
Ormco and AOA appealed that injunction and the orders of the District Court on
summary judgment on which that order was based.
Oral argument took place on April 3, 2006. Following oral argument, the U.S. Court of
Appeals for the Federal Circuit (CAFC) issued a ruling declaring two out of a
total of seventy-one claims in our US Patent No. 6,398,548 and four out of a
total of ten claims in US Patent No. 6,544,611 to be invalid as obvious. The
CAFCs decision reverses the California District Court summary judgment order
of validity.

The second appeal is from the final judgment. Once
final judgment was entered, Ormco filed a Notice of Appeal from the final
judgment and the Company filed a notice of cross-appeal. Ormco has appealed the ruling of the District
Court that its patents are not infringed by the Company and that the asserted
claims are invalid. The Company appealed
the ruling of the District Court that certain claims of its 6,398,548 patent
which were found to be infringed by Ormcos and AOAs Red, White & Blue
appliances were invalid. Briefing on
this appeal and cross-appeal is complete, and oral argument occurred on
February 6, 2007.

Litigating claims of these types, whether or not
ultimately determined in the Companys favor or settled by the Company, is
costly and diverts the efforts and attention of the Companys management and
technical personnel from normal

10

business operations. Any of
these results from litigation could adversely affect the Companys results of
operations. From time to time, the
Company has received, and may again receive, letters from third parties drawing
the Companys attention to their patent rights. While the Company does not
believe that it infringes any such rights that have been brought to the Companys
attention, there may be other more pertinent proprietary rights of which the
Company is presently unaware.

State
Action.On
February 2, 2005, the Company filed a multi-claim lawsuit in San Francisco
County Superior Court against defendants OrthoClear, Inc., OrthoClear
Holdings, Inc., Muhammad Ziaullah Chishti, Bao Tran, Peter Riepenhausen,
Joe Breeland, Jeff Tunnell, Christopher Kawaja, and Charles Wen (the State
Action). Among other things, the State Action alleged tort, contract,
statutory and common law causes of action arising from OrthoClear and the
individual defendants alleged plan to unlawfully utilize the Companys
intellectual property, confidential information and employees. The State Action
also alleged that OrthoClear, Chishti and other defendants were in breach of
contractual obligations, statutory law and common law for attempting to
intentionally interfere and disrupt the Companys ongoing business operations
and improperly gain access to its customer relationships and trade secrets. Subsequent
to the initial filing date, there were extensive proceedings in the case as
reported in previous Align filings.

Federal
Lanham Action. On July 19, 2005 and June 19,
2006, the Company filed a multi-claim lawsuit in the United States District
Court for the Northern District of California against OrthoClear (the Federal
Lanham Action I and Federal Lanham Action II, respectively). The Federal
Lanham Action I and Federal Lanham Action II alleged numerous violations of the
Federal Lanham Act (15 U.S.C. §1051 et seq.) by OrthoClear and its officers and
employees. These violations include unfair competition, trademark infringement
and false advertising, among other things. The Federal Lanham Action I and
Federal Lanham Action II also alleged violations by OrthoClear of Californias
Unfair Practices Act (California Business and Professions Code §17200 et seq.).

Patent
Infringement ITC Complaint. On January 11,
2006, the Company filed a formal complaint with the United States International
Trade Commission (ITC) against OrthoClear, seeking to halt the importation into
the United States of infringing certain patents of the Company.

Patent Infringement
Federal Action. On January 11, 2006, the
Company filed a federal court patent infringement action against OrthoClear in
the Western District of Wisconsin (Madison) (the Patent Infringement Federal
Action) asserting infringement of certain patents of the Company.

OrthoClear
Agreement

On October 13,
2006, the Company and OrthoClear, Inc., OrthoClear Holdings, Inc.,
and OrthoClear Pakistan Pvt. Ltd. (OrthoClear), together with certain
individuals associated with OrthoClear, executed a formal agreement (the OrthoClear
Agreement). The OrthoClear Agreement included the following terms:

·OrthoClear consented to the
entry of an exclusion order by the ITC, enforced by the United States Customs
Service, which prevents OrthoClear from importing its dental aligner products
into the U.S., either directly or through a third party and the ITC
subsequently terminated the ITC action on October 27, 2006;

·The parties agreed to
dismiss all pending lawsuits against each other, including the State Case,
Federal Lanham Action I, Federal Lanham Action II, Patent Infringement Federal
Action, with prejudice, and each such action has been subsequently dismissed;

·OrthoClear agreed to stop
accepting new patient cases for treatment;

·OrthoClear and Muhammad
Ziaullah Chishti its CEO, and Charles Wen, its President, transferred and assigned to Align all
intellectual property rights with application to the treatment of malocclusion;

·The Company made Invisalign
treatment available to OrthoClear patients in the United States, Canada and
Hong Kong at no charge from Align. The Company implemented this program as the
Patients First Program.

In accordance with the
terms of the OrthoClear Agreement, on October 16, 2006, the Company made a
one-time cash payment of $20.0 million to OrthoClear Holdings, Inc. See Note 2 Patients First Programs and settlement costs of the Notes
to Consolidated Financial Statements for discussion on Patients First Program.

On February 2, 2005, we filed a
multi-claim lawsuit in San Francisco County Superior Court against defendants
OrthoClear, Inc., OrthoClear Holdings, Inc., Muhammad Ziaullah
Chishti, Bao Tran, Peter Riepenhausen, Joe Breeland, Jeff Tunnell, Christopher
Kawaja, and Charles Wen. Among other things, the complaint alleges tort,
contract, statutory and common law causes of action arising from OrthoClear and
the individual defendants alleged plan to unlawfully utilize our intellectual
property, confidential information and employees. The complaint also alleges
that OrthoClear, Chishti and other defendants are in breach of contractual
obligations, statutory law and common law for attempting to intentionally
interfere and disrupt our ongoing business operations and improperly gain
access to our customer relationships and trade secrets. The complaint seeks
injunctive relief and monetary damages in an amount to be determined.

On February 18, 2005, the Court granted
our request for and issued a Temporary Restraining Order (TRO) prohibiting
OrthoClear and the individual OrthoClear defendants from engaging, assisting,
or participating, directly or indirectly, in soliciting, inducing to leave,
recruiting, or encouraging any current Align employee or consultant to
terminate or alter his or her employment or business relationship with Align or
attempting to do the same. The Court also granted our request and issued a TRO
prohibiting OrthoClear and the individual OrthoClear defendants from
disclosing, using, lecturing upon or publishing any of our proprietary
information without our express prior written permission. In addition, in
response to a cross-application for TRO filed by certain OrthoClear defendants,
the Court enjoined Chishti and the Align Parties from disparaging each other in
such a manner as to violate the mutual non-disparagement clause contained in
the Separation

Agreement between Align and Chishti dated as of March 27, 2002.
The Court also enjoined the Align Parties from advising any Align employee or
consultant that he or she will be subject to criminal charges or a civil
lawsuit if that person elects to change his or her employment status with
Align, unless we have good cause to believe criminal conduct has been or will
be committed or that a civil cause of action will lie against the employee or
consultant. The Court also required the Align Parties to refrain from taking
any actions inconsistent with Federal or State securities laws relating to the
issuance or redemption of Align stock. On March 1, 2005, the Court signed
a Stipulated Preliminary Injunction Order, whereby the Court ordered that the
express terms of the TRO remain in place until the earlier of (i) trial, (ii) written
agreement of the parties or further Court order setting an earlier termination,
or (iii) as to the preliminary injunction regarding non-solicitation or
recruiting of Align employees or consultants only, October 27, 2005.

The defendants and the Align Parties filed
demurrers to the complaint and the cross-complaint, respectively. On June 6,
the Court ruled on demurrers on the complaint filed by OrthoClear and denied
OrthoClears challenges to the core of our complaintAligns claims of
Misappropriation of Trade Secrets and Breach of Contractby overruling the
OrthoClear demurrers to these causes of action. In addition, the Court granted
our request for permission to amend our original complaint to consolidate
several duplicative causes of action and to add specific evidence not available
to us when the original complaint was filed.
OrthoClear did not oppose the demurrer filed by us and amended its
original pleading by filing a first supplemental and amended cross-complaint.

On July 6, 2005, OrthoClear filed a
demurrer to our first amended complaint. On August 23, 2005, the Court
issued an order overruling all of OrthoClears demurrers. As a result, on September 9,
2005, OrthoClear filed answers to eleven causes of action brought by us. In September 2005,
we presented demurrers to OrthoClears first supplemental and amended
cross-complaint. As of the date of this Form 10-Q, the Court has not ruled
on our demurrers. We deny the
allegations in the amended cross-complaint, and will vigorously defend against
such claims that survive our demurrers. A trial date has been scheduled for
October 30, 2006.

35

On July 19, 2005, we filed a multi-claim
lawsuit in the United States District Court for the Northern District of
California against OrthoClear. The
complaint alleges numerous violations of the federal Lanham Act (15 U.S.C.
§1051 et seq.) by OrthoClear and its officers and employees. These violations include unfair competition,
trademark infringement and false advertising.
The complaint also alleges violations by OrthoClear of Californias
Unfair Practices Act (California Business and Professions Code §17200 et seq.).

The complaint seeks monetary damages
according to proof at trial and an injunction preventing OrthoClear from
further false advertising and unfair competition including any use of our trademarks
or any advertising which deceives consumers into incorrectly believing that
OrthoClear has a program for training and certifying dentists and orthodontists
or that dentists or orthodontists have used OrthoClear to successfully treated
patients. No trial date has been set in the case.

Ormco

On January 6, 2003, Ormco Corporation (Ormco)
filed suit against us in the United States District Court for the Central
District, Orange County Division, asserting infringement of U.S. Patent Nos.
5,447,432, 5,683,243 and 6,244,861. The complaint sought unspecified monetary
damages and injunctive relief. On February 18, 2003, we answered the
complaint and asserted counterclaims seeking a declaration by the Court of
invalidity and non-infringement of the asserted patents. In addition, we
counterclaimed for infringement of our U.S. Patent No. 6,398,548, seeking
unspecified monetary damages and injunctive relief. Ormco filed a reply to our
counterclaims on March 10, 2003 and asserted counterclaims against us seeking
a declaration by the Court of invalidity and non-infringement of U.S. Patent No. 6,398,548.
We amended our counterclaim to add Allesee Orthodontic Appliances, Inc. (AOA),
a wholly-owned subsidiary of Ormco, as a counterdefendant in regard to our counterclaim
of infringement of U.S. Patent No. 6,398,548. The Court then permitted
Ormco to amend its Complaint and permitted us to amend our counterclaim to add
an additional patent each. Ormco filed a first amended complaint for
infringement of U.S. Patent No. 6,616,444 on October 15, 2003. On October 27,
2003, we filed an answer to Ormcos first amended complaint and a counterclaim
for invalidity and non-infringement of U.S. Patent No. 6,616,444 and for
infringement of U.S. Patent No. 6,554,611.

In connection with these claims, the Court
granted five motions for summary judgment that we filed. First, on May 14,
2004, the Court granted our motion for summary judgment of non-infringement,
finding that our Invisalign system does not infringe any of the asserted Ormco
patents (5,477,432, 5,683,243, 6,244,861 and 6,616,644). Second, on July 2,
2004, the Court granted in part our motion for summary judgment of
infringement, finding that Ormco and AOA infringe certain, but not all, claims
of our patents Nos. 6,398,548 and 6,554,611 through the manufacture and sale of
Red, White & Blue appliances. Third, on August 26, 2004, the
Court granted our motion for summary judgment of invalidity of Ormcos asserted
patents claims (5,477,432, 5,683,243, 6,244,861 and 6,616,644). As noted above,
the Court earlier found that we do not infringe these patents. In addition, the
Court also denied Ormcos and AOAs motion for summary judgment seeking a
finding of invalidity of our asserted patent claims (6,398,548 and 6,554,611).
Fourth, the Court granted our summary judgment motion that our asserted patent
claims are not invalid based on the evidence currently before the Court.
Although the Court granted that motion, it reopened discovery on two additional
invalidity arguments Ormco and AOA asserted. Fifth, the Court also granted our
summary judgment motion that our patents are not unenforceable and granted
Ormcos and AOAs summary judgment motion that Ormco and AOA did not willfully
infringe our patents.

36

On December 20, 2004, we filed a further
summary judgment motion that our asserted claims are not invalid based on Ormcos
and AOAs new evidence. Ormco and AOA filed a counter-summary judgment motion
that our asserted claims are invalid based on this new evidence. The motions
were heard by the Court on February 7, 2005. On February 24, 2005,
the Court granted our motion in part, confirming the validity of all of the
asserted claims of our 6,554,611 patent and two of the asserted claims of our
6,398,548 patent. The Court also granted Ormcos and AOAs motion in part,
finding certain claims of our 6,398,548 patent to be invalid in view of prior
use evidence. On March 10, 2005, Ormco and AOA moved for reconsideration
of the Courts ruling that Claims 10 and 17 of our U.S. Patent No. 6,398,548
are not invalid. On April 8, 2005,
upon a motion for reconsideration made by Ormco and AOA, the Court advised that
it would adhere to its previous ruling that Claims 10 and 17 of our 6,398,548
patent are not invalid.

On March 28, 2005, we filed a motion for
permanent injunction to prevent Ormco and AOA from selling the infringing Red,
White & Blue system. On May 26,
2005, the Court issued a permanent injunction (the Permanent Injunction) to
enjoin Ormco and AOA from further infringement of Claims 10 and 17 of our
6,398,548 patent and Claims 1-3 and 7 of our 6,554,611 patent. On May 31,
2005, Ormco and AOA noticed an appeal to the Federal Circuit from the Permanent
Injunction. As of the date of this Form 10-Q,
the Permanent Injunction remains in full force and effect.

As of the date of this Form 10-Q, only
our remedies for Ormcos and AOAs adjudged infringement remain at issue A trial date has been scheduled for February 28,
2006.

Other matters

In the second quarter and third quarter of
2005, requests were filed with the United States Patent and Trademark Office (USPTO)
by a San Francisco, California, law firm, acting on behalf of an unnamed party,
requesting reexamination of five of our patents (U.S. Patent Nos. 5,975,893,
6,398,548, 6,309,215, 6,705,863 and 6,217,325, (collectively, the Reexam
Patents)). The USPTO granted the request to reexamine the Reexam Patents. The reexamination proceedings on these
patents are currently pending. While the pending reexaminations are in a
preliminary stage and we are still evaluating all issues, we believe that the
Reexam Patents are valid. However, there
can be no assurance that we will prevail, and an adverse outcome of the
reexamination proceedings could cause some or all of the Reexam Patent claims
to have a narrower scope of coverage or even to be invalidated.

On July 25, 2005, Bay Materials, LLC (Bay)
filed suit against us in the Superior Court of the State of California for the
County of San Mateo. The complaint, as amended, asserts, among other things,
breach of contract, promissory estoppel, fraud and negligent misrepresentation
by us. Bay alleges that we breached the
terms of a purchase order by failing to pay for unshipped goods manufactured by
Bay pursuant to such order. Bay further alleges that we promised to purchase
from Bay an alternative polyurethane product and Bay relied on this
representation to develop such an alternative product which we determined not
to use. The complaint seeks monetary damages of $1.1 million related to breach
of contract and research and development costs incurred plus unspecified
damages related to lost profit, punitive and exemplary damages, and legal
expenses. We intend to vigorously defend ourselves.

On February 2, 2005, the Company filed a multi-claim lawsuit in San Francisco County Superior Court against defendants OrthoClear, Inc., OrthoClear
Holdings, Inc., Muhammad Ziaullah Chishti, Bao Tran, Peter Riepenhausen, Joe Breeland, Jeff Tunnell, Christopher Kawaja, and Charles Wen. Among other things, the complaint alleges tort,
contract, statutory and common law causes of action arising from
OrthoClear and the individual defendants' alleged plan to unlawfully utilize the Company's intellectual property, confidential information and employees. The complaint also alleges that OrthoClear,
Chishti and other defendants are in breach of contractual obligations, statutory law and common law for attempting to intentionally interfere and disrupt the Company's ongoing business operations and
improperly gain access to the Company's customer relationships and trade secrets. The complaint seeks injunctive relief and monetary damages in an amount to be determined.

On
February 18, 2005, the Court granted the Company's request for and issued a Temporary Restraining Order ("TRO") prohibiting OrthoClear and the individual OrthoClear defendants
from engaging, assisting, or participating, directly or indirectly, in soliciting, inducing to leave, recruiting, or encouraging any current Align employee or consultant to terminate or alter his or
her employment or business relationship with Align or attempting to do the same. The Court also granted our request and issued a TRO prohibiting OrthoClear and the individual OrthoClear defendants
from disclosing, using, lecturing upon or publishing any of our proprietary information without our express prior written

11

permission.
In addition, in response to a cross-application for TRO filed by certain OrthoClear defendants, the Court enjoined Chishti and the Align Parties from disparaging each other in such a
manner as to violate the mutual non-disparagement clause contained in the Separation Agreement between Align and Chishti dated as of March 27, 2002. The Court also enjoined the
Align Parties from advising any Align employee or consultant that he or she will be subject to criminal charges or a civil lawsuit if that person elects to change his or her employment status with
Align, unless Align has good cause to believe criminal conduct has been or will be committed or that a civil cause of action will lie against the employee or consultant. The Court also required the
Align Parties to refrain from taking any actions inconsistent with Federal or State securities laws relating to the issuance or redemption of Align stock. On March 1, 2005, the Court signed a
Stipulated Preliminary Injunction Order, whereby the Court ordered that the express terms of the TRO remain in place until the earlier of (i) trial, (ii) written agreement of the parties
or further Court order setting an earlier termination, or (iii) as to the preliminary injunction regarding non-solicitation or recruiting of Align employees or consultants only,
October 27, 2005.

The
defendants and the Align Parties have filed demurrers to the complaint and the cross-complaint, respectively. The parties have commenced written discovery.

The
Company denies the allegations in the cross-complaint, and will vigorously defend against such claims. No trial date has been set in the case.

On
January 6, 2003, Ormco Corporation ("Ormco") filed suit against the Company in the United States District Court for the Central District, Orange County Division, asserting
infringement of U.S. Patent Nos. 5,447,432, 5,683,243 and 6,244,861. The complaint sought unspecified monetary damages and injunctive relief. On February 18, 2003, the Company answered the
complaint and asserted counterclaims seeking a declaration by the Court of invalidity and non-infringement of the asserted patents. In addition, the Company counterclaimed for infringement
of its U.S. Patent No. 6,398,548, seeking unspecified monetary damages and injunctive relief. Ormco filed a reply to the Company's counterclaims on March 10, 2003 and asserted
counterclaims against the Company seeking a declaration by the Court of invalidity and non-infringement of U.S. Patent No. 6,398,548. The Company responded to Ormco's counterclaims
on April 2, 2003. The Company amended its counterclaim to add Allesee Orthodontic Appliances, Inc. ("AOA"), a wholly-owned subsidiary of Ormco, as a counterdefendant in regard to the
Company's counterclaim of infringement of U.S. Patent No. 6,398,548. The Court then permitted Ormco to amend its Complaint and permitted the Company to amend its counterclaim to add an
additional patent each. Ormco filed a first amended complaint for infringement of U.S. Patent No. 6,616,444 on October 15, 2003. On October 27, 2003, the Company filed an answer
to Ormco's first amended complaint and a counterclaim for invalidity and non-infringement of U.S. Patent No. 6,616,444 and for infringement of U.S. Patent No. 6,554,611.

In
connection with these claims, the Court granted five motions for summary judgment that the Company filed. First, on May 14, 2004, the Court granted the Company's motion for
summary judgment of non-infringement, finding that the Company's Invisalign system does not infringe any of the asserted Ormco patents (5,477,432, 5,683,243, 6,244,861 and 6,616,644).
Second, on July 2, 2004, the Court granted in part the Company's motion for summary judgment of infringement, finding that Ormco and AOA infringe certain, but not all, claims of the Company's
patents Nos. 6,398,548 and 6,554,611 through the manufacture and sale of Red, White & Blue appliances. Third, on August 26, 2004, the Court granted the Company's motion for summary
judgment of invalidity of Ormco's asserted patents claims (5,477,432, 5,683,243, 6,244,861 and 6,616,644). As noted above, the Court earlier found

12

that
the Company does not infringe these patents. In addition, the Court also denied Ormco's and AOA's motion for summary judgment seeking a finding of invalidity of the Company's asserted patent
claims (6,398,548 and 6,554,611). Fourth, the Court granted the Company's summary judgment motion that the Company's asserted patent claims are not invalid based on the evidence currently before the
Court. Although the Court granted that motion, it reopened discovery on two additional invalidity arguments Ormco and AOA asserted. Fifth, the Court also granted the Company's summary judgment motion
that the Company's patents are not unenforceable and granted Ormco's and AOA's summary judgment motion that Ormco and AOA did not willfully infringe the Company's patents.

On
December 20, 2004, the Company filed a further summary judgment motion that the Company's asserted claims are not invalid based on Ormco's and AOA's new evidence. Ormco and AOA
filed a counter-summary judgment motion that the Company's asserted claims are invalid based on this new evidence. The motions were heard by the Court on February 7, 2005. On
February 24, 2005, the Court granted the Company's motion in part, confirming the validity of all of the asserted claims of the
Company's 6,554,611 patent and two of the asserted claims of the Company's 6,398,548 patent. The Court also granted Ormco's and AOA's motion in part, finding certain claims of the Company's 6,398,548
patent to be invalid in view of prior use evidence. On March 10, 2005, Ormco and AOA moved for reconsideration of the Court's ruling that Claims 10 and 17 of the Company's U.S. Patent
No. 6,398,548 are not invalid. The Court took this motion under submission on the papers without a hearing.

On
March 28, 2005, the Company filed a motion for permanent injunction to prevent Ormco and AOA from selling the infringing Red, White & Blue system. Ormco and AOA did not
oppose issuance of a permanent injunction but disagreed as to scope. The Company amended its motion on April 25, 2005 and, on May 2, 2005, Ormco and AOA filed an opposition to the
permanent injunction. Previously, on April 4, 2005, Ormco and AOA filed a motion to stay any permanent injunction that should issue during any appeal that Ormco and AOA file. The Court took
this motion under submission and will rule on the motion when the language of the permanent injunction is settled.

The
Court has scheduled a pre-trial conference for June 3, 2005. As of the date of this Form 10-Q, only the Company's remedies for Ormco's and AOA's
adjudged infringement remain at issue.

On February 2, 2005, we filed a multi-claim lawsuit in San Francisco County Superior Court against defendants OrthoClear, Inc., OrthoClear Holdings, Inc., Muhammad Ziaullah Chishti, Bao Tran, Peter Riepenhausen, Joe
Breeland, Jeff Tunnell, Christopher Kawaja, and Charles Wen. Among other things, the complaint alleges tort, contract, statutory and common law causes of action arising from OrthoClear and the individual defendants alleged plan to unlawfully
utilize Aligns intellectual property, confidential information and employees. The complaint also alleges that OrthoClear, Chishti and other defendants are in breach of contractual obligations, statutory law and common law for attempting to
intentionally interfere and disrupt our ongoing business operations and improperly gain access to our customer relationships and trade secrets. The complaint seeks injunctive relief and monetary damages in an amount to be determined.

On February 18, 2005, the Court granted our request for and issued a
Temporary Restraining Order (TRO) prohibiting OrthoClear and the individual OrthoClear defendants from engaging, assisting, or participating, directly or indirectly, in soliciting, inducing to leave, recruiting, or encouraging any
current Align employee or consultant to terminate or alter his or her employment or business relationship with Align or attempting to do the same. The Court also granted our request and issued a TRO prohibiting OrthoClear and the individual
OrthoClear defendants from disclosing, using, lecturing upon or publishing any of our proprietary information without our express prior written permission. In addition, in response to a cross-application for TRO filed by certain OrthoClear
defendants, the Court enjoined Chishti and the Align Parties from disparaging each other in such a manner as to violate the mutual non-disparagement clause contained in the Separation Agreement between Align and Chishti dated as of March 27, 2002.
The Court also enjoined the Align Parties from advising any Align

employee or consultant that he or she will be subject to criminal charges or a civil lawsuit if that person elects to change his or her employment status
with Align, unless Align has good cause to believe criminal conduct has been or will be committed or that a civil cause of action will lie against the employee or consultant. The Court also required the Align Parties to refrain from taking any
actions inconsistent with Federal or State securities laws relating to the issuance or redemption of Align stock. The Court scheduled an Order to Show Cause hearing why a Preliminary Injunction should not be issued in accordance with the terms of
the TRO for March 8, 2005. On March 1, 2005, the Court signed a Stipulated Preliminary Injunction Order, whereby the Court ordered that the March 8th hearing date be vacated and further ordered that the express terms of the TRO remain in place until
the earlier of (i) trial, (ii) written agreement of the parties or further Court order setting an earlier termination, or (iii) as to the preliminary injunction regarding non-solicitation or recruiting of Align employees or consultants only, October
27, 2005. Align denies the allegations in the Cross-Complaint, and will vigorously defend against such claims. No trial date has been set in the case.

On January 6, 2003, Ormco Corporation (Ormco) filed suit against us in the United States District Court for the Central District, Orange
County Division, asserting infringement of U.S. Patent Nos. 5,447,432, 5,683,243 and 6,244,861. The complaint seeks unspecified monetary damages and injunctive relief. On February 18, 2003, we answered the complaint and asserted counterclaims
seeking a declaration by the Court of invalidity and non-infringement of the asserted patents. In addition, we counterclaimed for infringement of our U.S. Patent No. 6,398,548, seeking unspecified monetary damages and injunctive relief. Ormco filed
a reply to our counterclaims on March 10, 2003 and asserted counterclaims against us seeking a declaration by the Court of invalidity and non-infringement of U.S. Patent No. 6,398,548. We responded to Ormcos counterclaims on April 2, 2003. We
amended our counterclaim to add Allesee Orthodontic Appliances, Inc. (AOA), a wholly-owned subsidiary of Ormco, as a counterdefendant in regard to our counterclaim of infringement of U.S. Patent No. 6,398,548. The Court then permitted
Ormco to amend its Complaint and permitted us to amend our counterclaim to add an additional patent each. Ormco filed a first amended complaint for infringement of U.S. Patent No. 6,616,444 on October 15, 2003. On October 27, 2003, we filed an
answer to Ormcos first amended complaint and a counterclaim for invalidity and non-infringement of U.S. Patent No. 6,616,444 and for infringement of U.S. Patent No. 6,554,611.

In connection with these claims, the Court granted five motions for summary judgment that we filed. First, on May 14, 2004,
the Court granted our motion for summary judgment of non-infringement, finding that our Invisalign system does not infringe any of the asserted Ormco patents (5,477,432, 5,683,243, 6,244,861 and 6,616,644). Second, on July 2, 2004, the Court granted
in part our motion for summary judgment of infringement, finding that Ormco and AOA infringe certain, but not all, claims of our patents Nos. 6,398,548 and 6,554,611 through the manufacture and sale of Red, White & Blue appliances. Third, on
August 26, 2004, the Court granted our motion for summary judgment of invalidity of Ormcos asserted patents claims (5,477,432, 5,683,243, 6,244,861 and 6,616,644). As noted above, the Court earlier found that we do not infringe these patents.
In addition, the Court also denied Ormcos motion for summary judgment seeking a finding of invalidity of our asserted patent claims (6,398,548 and 6,554,611). Fourth, the Court granted our summary judgment motion that our asserted patent
claims are not invalid based on the evidence currently before the Court. Although the Court granted that motion, it reopened discovery on two additional invalidity arguments Ormco asserted. Fifth, the Court also granted our summary judgment motion
that our patents are not unenforceable and granted Ormcos summary judgment motion that Ormco did not willfully infringe our patents.

On December 20, 2004, we filed a further summary judgment motion that our asserted claims are not invalid based on Ormcos new evidence. Ormco filed
a counter-summary judgment motion that our asserted claims are invalid based on this new evidence. The motions were heard by the Court on February 7, 2005. On February 24, 2005, the Court granted our motion in part, confirming the validity of all of
the asserted claims of our 6,554,611 patent and two of the asserted claims of our 6,398,548 patent. The Court also granted Ormcos motion in part, finding certain claims of our 6,398,548 patent to be invalid in view of prior use evidence. At
this stage, only our remedies for Ormcos adjudged infringement remain at issue.

Litigating claims of these types, whether or not ultimately determined in our favor or settled by us, is
costly and diverts the efforts and attention of our management and technical personnel from normal business operations. Any of these results from litigation could adversely affect our results of operations and stock price. From time to time, we have
received, and may again receive, letters from third parties drawing our attention to their patent rights. While we do not believe that we infringe any such rights that have been brought to our attention, there may be other more pertinent proprietary
rights of which we are presently unaware.